The relation between internal inflation and the balance of payments

Abstract

The article focuses on certain basic issues involved in the relation between internal inflation and the balance of payments, considering the subject matter from a mathematical point of view. The author on the one hand makes a rigorous restatement of the methodological aspects, and on the other hand tries to bring the problem back to its fundamental terms. According to the analysis, although the balance on current account is identical with the balance between national income and national expenditure, a deficit of given size will not be eliminated by a reduction in expenditure equal in size to that deficit. As a rule, a larger reduction is necessary, which will lead away from high employment. Nonetheless, balance of payments equilibrium and high employment are not necessarily incompatible; their simultaneous realisation calls for the use of more than one instrument of economic policy. The price level may be one of them, however, under certain circumstances prices are an insufficient regulator and quantitative restrictions have to be applied.

JEL: E31, F32